Is the 40-year mortgage a joke? |
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A 40-year mortgage also gives borrowers flexibility since the payment is lower, but they can still make extra payments to pay off the loan more quickly, says Bob Walters, chief economist at Quicken Loans. The term of the loan "doesn't have to be locked into 40 years," he says. "You can't make it longer, but you can certainly make it shorter."
Some 40-year mortgages are "Fannie Mae-eligible," which means the lender can sell those loans to Fannie Mae, one of the secondary market mortgage corporations that operates under federal government conservatorship. The guidelines posted on eFannieMae.com state that this type of loan product "is ideal for borrowers who face affordability issues and think homeownership is beyond their reach."
Loan repays some principal
A 151-page bill introduced in the U.S. House of Representatives, H.R. 1728, could change some of the regulations that govern how lenders originate certain mortgages that are deemed to be nonstandard because they can be riskier or more expensive for borrowers than a conventional, 30-year fixed-rate loan. Some analysts have suggested that the bill's promise of a lawsuit-free "safe harbor" for certain 30-year, fixed-rate mortgages would encourage lenders to discontinue or raise interest rates further on other types of loan products.
Indeed, Rep. Gregory Meeks, D-N.Y., told the House Committee on Financial Services that the bill would encourage "the market to move toward making 30-year, fixed-rate fully documented loans the standard once again in mortgage lending," according to a prepared statement.
The bill's future is uncertain, as is the effect it would have on 40-year mortgages in particular; however, borrowers should be aware that Congress has taken an interest in the issue of nonstandard mortgages.
Modification may extend loan to 40 years
Homeowners who can't afford their mortgage payment may be offered a 40-year term as part of a loan modification agreement. For instance, the federal government's Home Affordable Modification program extends the loan term to 40 years if the payment is still more than 31 percent of the homeowner's income after missed payments and other arrearages are added to the loan balance and the interest rate is lowered in small increments to just 2 percent.
Whether a 40-year mortgage makes sense for these borrowers depends largely on whether they can afford the modified payment, Satnick says. If they can make the modified payment and meet their other monthly expenses, a 40-year term may make sense. If not, the modified loan may not be sustainable.
"They have to be very honest with themselves," he says.
The bottom line on 40-year mortgages may be that, like most loan products, their wise or foolish use depends mainly on the borrower's financial goals and objectives.
"There is nothing inherently wrong with it; there is nothing inherently right with it," says Walters. "It's simply a longer term that usually takes longer to pay off but gives you a lower payment. It's as simple as that."
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